Monday, 9 April 2018

Kenya gearing for economic take-off

Dogo Kundu By-pass
Dogo Kundu by-pass phase 2&3, Lamu-Isiolo Highway, Second Runway at JKIA, the phase 2 Standard\gauge Railway, Thwake Dam…all gearing for construction this year and the next. At this rate, Kenya will soon look like a big Construction site. 
 Kenya is gearing for economic take-off “into a newly industrializing middle-income country providing quality life to all its citizens by 2030” says the long-term development strategy, Vision 2030.

 The construction of a string of mega-projects in key sectors of the economy worth billions of US dollars across the country will soon begin. Some are on-going and are nearing completion. Some are Greenfield, others are extensions of existing infrastructure. And some compliment already completed projects, improving their operational efficiency.  The projects are well distributed among such key sectors as transport, energy, ICT, and water. All have one thing in common, they are transformative in nature.
 Transformative infrastructure serves more than just its immediate functions.  They spark off productivity in existing sectors or enable new ones to come on board, shifting the production curve outwards.
For instance, the Second runway at Jomo Kenyatta International airport, will not only increase parking space, and increase the frequency of landings and take-offs from 25 to 45 aircrafts an hour, it will enable exporting sectors to reach a wider market.
Newly paved roads will not only cut the cost of travel and increase speed, they also open up new markets for both local produce and imports, lower, distribution costs and increase the speed of distribution of local products thus lowering consumer prices. They also cut down health costs and improve the balance of payments.
The US$ 620 million Lamu- Isiolo highway, for example, whose construction begins in the second half of this year, will traverse 10 towns in four counties. It is the first indication that Kenya is determined to implement LAPSSET, the US$23 billion project opening Northern Kenya which forms two-thirds of the country’s land mass, for exploitation to contribute to the nation’s wealth creation. Read
Both Isiolo and Lamu are also planning to develop resort cities as part of the Lapsset development but they, together with Turkana, are expected to grow into major energy cities. Several energy sources, including Oil and wind power, have been discovered in this region.  Read
Also in the transport sector, the construction of the second phase of the Standard Gauge Railway from Nairobi- to Naivasha will be completed in September 2019, three months ahead of schedule. This follows the completion of Mombasa –Nairobi section which was completed 18 months ahead of schedule. A Special Economic Zone is also expected to be up and running by the same time in Naivasha.
The completion and lengthening of the SGR, coupled with the completion of investment in the ICD in Nairobi compliments the expansion and deepening of the Mombasa port that is nearing completion.  For more read:
 The tender for the construction of the $350 million second runway at the Jomo Kenyatta International airport has been advertised. The runway will increase the movement of aircraft from 25 to 45 per hour and accommodate wide-bodied aircraft.  It will “enable direct intercontinental flights to North America and Australia. This is expected to increase access for Kenyan floricultural produce to new markets,” says the Africa Development Bank.
Ol Karia Geothermal station
 The construction of the runway will support the creation of an estimated 1.5 million jobs across the sectors and expansion of the economy by an additional $22.7 billion a year, the bank concludes. This is 30 percent of the current GDP estimated at US$75 billion.
Investment in green and renewable sources of energy generation increase power supply and lower costs of power. They also increase productivity in the economy as more manual activities are electrified. Among the sources is wind power, the largest of which is Lake Turkana wind project.
The Project is complete and awaiting the completion of Loiyangalan– Suswa 440KV power transmission in August to evacuate power from Lake Turkana Wind power farm. The 330 Mw facility, arguably the largest in Africa, will raise electricity supply by 20 percent of the current generating capacity and begin to lower costs of electricity as more Thermal generators are decommissioned.
 In the water sector, some 57 small and Mega-dams are at various stages of implementation across the country.  All are expected to be operational by the end of the current national development strategy, vision 2030.  Thirty of these will be completed by 2019 says the Water Ministry. “The idea is to increase the volume of water for irrigation and correct the blunders made in previous schemes, including the Galana-Kulalu Food Security Project. Its failure was blamed on inadequate water,” it said in an interview with a local daily.
Silicon savannah
Apart from enabling food production through irrigation, the larger dams will also generate power and introduce more economic activities in the project areas. Among the dams whose construction should start this year is the 27 story- high- 22 kilometre long Thwake Dam in Makueni and Kitui counties border. The project, the largest Multi-purpose dam in east Africa will transform an arid area into a bread basket.
In addition, the dam will support the growth of Konza ICT city and its environs. The city, arguably the first of its kind in Africa is located just 60Km Southwest of Nairobi, at Konza in Makueni country.
Dubbed the silicon Savannah of Africa, Konza ICT City is a greenfield project that will spearhead Africa's entry into the world of ICT-something similar to Silicon Valley in the US.  The city will be served by a high-speed Railway which is already complete. It is also fronted by the Mombasa –Highway which is being expanded to a six-lane expressway.   For more Read:
Generally, Kenya is gearing for take-off into the higher echelons of Middle-income country thus increasing not only the number
of goods and services available but also increase employment.
The construction of the projects is itself generating employment and increasing incomes across the country and among the drivers of the country’s robust economic growth.

The economy, the most diversified in the East African region has been robust over the last 16 years posting a GDP growth rate of 5 percent a year. In fact, the country has entered the lower ranks of Middle-income
country during this period. The country has become the Financial, Logistics, and ICT hub of the region.  The robust growth creates the right foundation for economic take-off.

Tuesday, 27 March 2018

Food security in Kenya: Feed the goose that lays the golden egg

Galana Kulalu: More large-scale
 Irrigation schemes needed
Expert reports show that Agriculture in Kenya generates 24 percent of the GDP directly, that is $18 billion at the current GDP estimated at US$75 billion. It also contributes another 27 percent indirectly to the GDP that is $20.25 billion.  In effect, the sector contributes, both directly and indirectly half of the national wealth that Is, $39 billion.
 The sector produces 62 percent of our exports, employs 40 percent of the entire labour force and 70 percent of the rural folk. It also generates an estimated 45 percent of Government revenue. The sector also produces over 75% of industrial raw materials and more than 50% of the export earnings.
Yet, says USAID in a report, the full potential of the land suitable for agriculture is not realized. USAID, estimates that only about 20 percent of the total land mass in Kenya is arable. Yet the full potential of this 20 percent is not achieved.
The bane of the agricultural sector in Kenya is the usual triumvirate- Rain-fed, lack of markets, low productivity. The result, so the argument goes food insecurity, malnutrition and widespread poverty in the rural areas. This has led to unrealistic approaches to improving food security and poverty alleviation in the rural areas.
The usual mantra being; allocate more to agriculture, train more extension officers, create markets, do more research in agriculture. At best these proposed solutions are isolationist, treating agriculture, the backbone of the Kenyan economy as an island.
The result has been; more blame game amid declining factor productivity in agriculture and growing numbers of feed. Food prices skyrocketed hitting the urban poor yet the rural folk are stuck in a poverty cycle. We have been suffocating the goose that lays the golden egg!
There is a positive correlation between productivity in agriculture and Gross domestic product (GNP) the measure of a country’s wealth creation. If agriculture thrives, wealth creation thrives. The reverse is also true: If agriculture shrinks, wealth creation shrinks too.
The sector so far gives more than it receives! Being the driver of the economy, it is the leading demander of goods and services produced in the country and also imports.
It therefore needs; good roads, water, electricity, Sea ports and Airports in addition to fertilizer, improved seeds and more extension workers. Support for the sector must be holistic.
In the past, infrastructure was designed to serve the urban economy: Water was extracted from the rural areas for drinking in urban areas and a little left for drinking by the rural households, none was set aside for agriculture, except for “kitchen gardening.” Electricity reached only cities “flying over” the rural areas while major roads had no designated markets for the rural folk.
More Multipurpose  dams needed
Without supporting infrastructure, the rural folk cut their losses by growing only what they need for their own consumption and a little to sell to buy sugar and salt.
The result high food prices in the urban sector, hitting the poor in urban areas hardest.
Time to change gears is now.  Agriculture must be the major driver in the design of infrastructure projects. Infrastructure design must of necessity include the needs of the rural folk. This, I think, is what is called inclusive development. Major trunk roads designs must include designated market slots tarmacked with parking bays -whether the market at the time exist or not. This is because roads create markets for goods. That is why hawkers are found at road bumps selling their wares, largely agricultural produce.
In addition, there is need to build all-weather roads linking the hinterlands to the major highways so that transporting farm produce to the market- whether local or to the cities- is cheap, fast, and reliable.
Roads: Not just expressways: Must
have designated markets spaces
 Official estimates put- post-harvest losses to 40 percent to of the produce. This is mainly because agricultural produce is perishable by nature and should reach the market in a short while. No good storage will maintain agricultural produce beyond its lifespan. Therefore ease of access to markets is the answer. This will motivate farmers to grow more for the market and less for subsistence.

 Further, there is need to process agricultural produce into value-added products whose shelf-life is longer. This means that the rural folk must be supplied with electricity to enable food processing in addition to other activities that support agriculture such as welding and other basic engineering activities. 
 And given the growing drought menace, water is no longer aplenty for the rural folk. Climate change is real and its time we changed tack.  We must turn to large-scale irrigated agriculture.
There is need to scale up investment in agriculture supporting infrastructure- Multipurpose dams, roads linking the rural area to urban areas, and connection to the national grid to enable the sector to drive the economy.
 These are massive investments running into billions of Dollars in sunk capital and they take years to complete. But this is the way to go. We must bite the bullet!

This is wasteful irrigation
Kenya’s the long-term development strategy, the Vision 2030, has jolted action in infrastructure development in the last 10 years or so. Newly paved roads both in urban and rural areas are being constructed and some are complete. New power generating capacity from various sources coming on stream and a large number of rural homes and institutions are being connected to the national grid.
At the moment there are 57 small and mega- dams at various stages of implementation across the country to store water for human and livestock consumption and irrigation.

 No resource is permanent, so the water must be conservatively used. Encouraging drip- technology to give plants the water they need without wasting it is the way to go. The technology is already available in the market. Drip technology for open field crops is being practiced at a small scale. The government should encourage large- scale drip irrigation in areas served by the dams. That way, it will ensure the resource is not wasted. 

Wednesday, 14 March 2018

The famous handshake: It’s economics, stupid!

Uhuru and Raila During the Handshake
If Anhui Construction Company of China bids and wins the contract for the construction of the proposed second runway at JKIA, then, Economics will be the real reason for the Uhuru-Raila amity.  The company was the winner of the bid to construct the now moribund US$656 million Greenfield terminal at JKIA.
And that project was one of the two mega projects that Jimmi Wanjigi had brokered, the other being the Standard Gauge Railway.  Both projects slipped through his fingers during the Uhuru Kenyatta administration, a loss that so angered him that he swore to bring down the Uhuru administration. He thus threw his weight -and finances- behind Raila Odinga’s ODM becoming the financier.
 However, that was a bad gamble for all his efforts to bring down the Jubilee administration came to naught. And even as he funded “operation bring Jubilee down,” the administration was slowly tightening the noose around his neck.
For five years, he never brokered any significant deal, legally or otherwise. It was a prolonged drought for him. And since NASA- which he midwifed-never made it to State House, he faced another five years of drought-longer than even the biblical seven years of famine faced in Egypt during Joseph’s days.
 Raila on the hand had promised Jimmi some lucrative contracts, worth some Kshs 2.27 trillion. Among these are the airports expansion and housing projects. Failure to deliver on these, Raila was to reimburse Jimmi some Kshs10 billion used for his Presidential Campaign plus interest- money the former does not have. And since he was not the tenant at State House, he had no way of paying.
Any astute businessman cuts his losses by either letting go of unnecessary baggage or abandoning some projects.  
Jimmi chose to cut losses and do some business. And he said as much in his Twitter handle on March 10..Among other things, he said "Astute Businessmen have Permanent interests, not Permanent enemies"  A lot was at stake: All major constructions contracts in this country will be implanted during Uhuru’s tenancy at stake House. That meant that even if Raila won in 2022, there will be nothing left for Jimmi. He had to move fast. 

What a finer way than to force an amity that could pave the way for him to do business? Anarchy was draining his resources with no viable source to replenish them.

The second runway at JKIA is estimated to cost almost what the Greenfield terminal cost –in the upwards of US$500 million. A ten percent cut comes to US$50 million, a huge plug on the hole punctured by political campaigns- and that from only one project! Two more of that magnitude in the next five years and he would be back where he was, if not ahead. So why not let go and move on? Add a few housing projects to the bargain and the dividends of an armistice were mouth -watering.

The old adage goes, if you can’t beat them, join them. So JW the father of political patronage decided to follow his “permanent interest”- making money by embracing his old foe, Uhuru Kenyatta. Here, JW was smart.

All he needed was to order his troops “to ceasefire and offer the Olive branch.” The result: armistice! All guns silent. Suddenly everything that NASA stood for – Resist, Secession, NRM, People’s Assemblies, People’s President, evaporated. We are back to abnormal- No strikes, No street demos, no bloodshed, nothing. That is the abnormal Kenya.

 Only JW can achieve that, after all, he bankrolled the troops and all he needed was to call back his debt and they all go on their knees like the biblical slave. Jimmi is credited for cobbling together NASA, an amalgamation of disparate tribal chiefs glued together by their ambition to occupy the house on the hill. By cobbling them together, he hoped they can marshal sufficient numbers to oust the current tenant.
They failed and were likely to drag him down with them. And only he could offer them –and himself-a lifeline.
JW: When Police Paid him a courtesy call
 For Uhuru, such that was a heaven send opportunity he could not let pass. He has his Big Four agenda which he hopes will be his legacy particularly building one million houses and building roads and railways. The Ceasefire presented him with an opportunity to deliver on his promises with little disruption. So what the Heck. Shake the devil’s hand and get down to business!
To deliver on his promises, he needs even the devil to play his part. Some of these guys can mobilize resources from somewhere to do some of the projects. So why not let them do it? Astute presidents don’t have permanent enemies, only interests. Here was a congruence of interests, a proper fit. We are all Kenyans so let’s develop our country, let each bring his peg to do that. Bingo! An armistice was born!
 For the hustler, this was his game. Ever the schemer, the son of a peasant from Sugoi has his road to the House on the Hill paved with gold.  For the next five years, he shall traverse the country, cobble together his team without some hooligans throwing stones at him. It is his to lose.
 Where does that leave the country? The first thing to die was the exclusion mantra. Now infrastructure projects-  10,000 Kms of roads,  some 600Km of a railway line, ports, 57 water dams, one million new affordable houses, can be built anywhere in Kenya without political sabotage. Construction of infrastructure is one of the most inclusive investments. It not only creates direct jobs, it also removes barriers to personal and community development. All weather roads, for instance, bring far away markets near.
Businessmen make profits and create more jobs. So if the 10,000Km road network is developed in the next five years, they will create jobs for all and sundry. This is the time for us all to eat. Kenya may live to cherish that handshake at Harambee house last Friday for a long time as the economy picks the cue and steams ahead.
 Should we expect to hit 10 percent GDP growth rate by 2022?  Only time will tell. But don’t be surprised if you found yourself there.

Tuesday, 13 March 2018

Kenya's growth rate to hit 5.8 percent in Q1

Kenya's PMI March'17-March'18
Courtesy CFC Stanbic
The Kenyan economy will post a 5.8 percent growth rate by the end of March and continue the same robust trend to the end of the year, experts say.  
This comes after a lean eight months of 2017. The period between  March and November last year, Kenya experienced a lean period we can report. Drought, coupled with political rumbling in the run-up to the August 8th general election slowed economic activity in the country.

According to CFC Stanbic, the PMI index declined constantly since March 2017 when it read 48 until October when presidential elections were held. In October, it read 34.4, the lowest level in a long time. The decline in PMI mirrors the decline in economic activity in the private sector. No wonder many companies are issuing a profit warning. The decline in profitability has also hit tax- collection putting the government in the red.

 However, Kenya’s economic recovery has picked up the pace, international research groups say. The first pointer to the robust recovery is the PMI, the Purchase Manager's Index, which says that the PMI for February rose to 54.9, the fastest growth in 20 months.

 The PMI is a composite measure of economic performance month-on-month covering 400 firms in Kenya’s private sector. It measures a weighted change in such variables as; New Orders  which is  weighted at  0.3, Output  at  0.25, Employment at  0.2, Suppliers’ Delivery Times at  0.15, Stock of Items Purchased at  0.1
 A reading above 50 shows growth in economic activity while a reading below 50 projects a decline.
According to CFC Stanbic, Kenya’s PMI turned north after the October Presidential elections, rising from a seasonally adjusted reading of 34.4 in October to 42.8 in November before crossing the Rubicon in December to close at 53. Since then it has been on the rise settling at 54.9 in February.

 The report attributes the rise after eight months of decline to the end of the electioneering period and the swearing of President Kenyatta for his second term. The decline in the risk of violence opened the purse-strings both in Kenya and overseas resulting in rising demand for local goods.

The report does not project the future but its survey found some latent demand, an indication that the growth trajectory is here to stay. Even then, analysts say, that it points to a robust growth this year.
The Economist Intelligence Unit for instance, projects a growth of 5.3 percent this year which is in the range of projections by other analysts whose projection range from 5.3 to 6.0 percent.  The Economic Focus group predicts a growth of 5.3 this year.
Agriculture: suffered from prolonged drought
The trading Economics Group projects a quarterly growth rate of 5.8 percent in Q1; 5.5 in Q2; 5.6 percent in Q3, closing the year at 6.5 percent in Q4. In short, Kenya will post robust economic growth this year, marking a major turnaround from eight months of poor growth.
 The poor growth, caused by among others factors, the long drought which made agriculture’s fortunes lean, and uncertainty due to political rumbling ahead of the elections last year. The lean times resulted in many firms in the private sector, especially those listed on the Nairobi Stock Exchange, issuing profit warnings. Retrenchment was also reported in those lean eight months.

The overall effect was lower tax -collection for taxes are collected from year-end trading profits. Consequently, the tax collector, the Kenya Revenue Authority, missed its revenue targets, punching a hole in the government’s kitty for the current financial year, ending on June 31st. As at the time of writing, some civil servants are yet to receive their February salaries due to cash flow issues at the treasury. Counties are yet to receive their remission from the treasury.
The lean times are likely to continue until the end of the current financial year in June, though the recently floated Eurobond 2 is likely to save the situation. The money, however, was not meant to recurrent expenditure.

 Despite the lean times, however, analysts are upbeat that the economy will post a robust growth, create jobs and raise tax revenue targets. This is mainly because the economy is well diversified, meaning it does not depend on one sector for growth.
The ongoing construction of mega projects is said to be one of the sectors driving growth in Kenya.  An expected turn around in the Kingpin of the economy, “agriculture supported by good rains, and an upturn in investment should bump up growth this year,” says the Economics Focus group, a view supported by the AFDB in its Kenya’s outlook which projects a 5.6 percent growth rate this year.

AfDB expects the services sector to continue leading the growth because, Kenya is the hub of ICT, Financial and logistics services in East Africa. It states that the continued investment in Rail and roads and the construction of the second runway at Jomo Kenyatta International airport will be a short in the arm for economic performance this year.

Monday, 5 March 2018


Thika superhighway, almost sabotaged
by the West
Dear Sir,
 My Late father once told me; "He who cannot be advised by a child does not have him." This was after I overheard him telling his wife-my mother - how he spend the whole day running from one office to the next in a bid to transfer his businesses to his wives’ names. Why was he doing all that? She asked.
Because a transport company he was a shareholder had been found liable by a court of law and ordered to pay damages! The company had long collapsed. So my father, fearing that the claimants would attach the property of the shareholders rushed to transfer his businesses to his wives’ names so that once the auctioneers come calling, they will find nothing to his name.
Now the transport company was a limited liability and from my rudimentary understanding of commercial law taught in my secondary school business class, I knew my father was not liable. I told him as much. He did not believe me neither did he ignore my advice until my brother, an accountant, confirmed my advice two days later. Hence his comment, which has stuck in my head from those days, just a few months after we buried our first president, your father.
 It is in the spirit of my father's compliment that I write to you, this lengthy letter your Excellency.
 The recent IMF mission in Kenya is said to have insisted on two things: Raise Petroleum prices through taxation and two repeal the caps interest rates.
Bujagali: M7 ignored the World Bank
I must declare, Your Excellency, that I do not trust the Bretton Woods institutions. Neither do I trust experts from these institutions. But let’s stick to the institutions: It is my considered opinion that these institutions offer advice unsuitable for Africa. This is why some Presidents have rejected such advice and had the last laugh. Also,
Take the collapsed privatization of Kenya Railways. It was forced down our throats by IFC, a Bretton Woods institution. I am informed that local experts had reservations about the deal but were ignored because the higher ups wanted to look good in the eyes of these institutions.
May I remind you, Your Excellency, that back in 2010, IFC, the World Bank private sector lending arm, also withdrew from a deal to construct the Southern By-pass in Nairobi citing credibility issues on the part of one of the contractors. The withdrawal saw the collapse of the deal and the proposed construction of the Southern bypass until the Chinese stepped in.
Now we have a bypass that “has cut the travel time by three hours,” to quote you, Mr. President. The same institution, World Bank almost sabotaged the LTWP saying it could produce more power than Kenya needed. The project is expected to come on stream in August this year.  I doubt whether it will face a shortage of demand. Mr. President, I doubt whether you would be talking about the completion of SGR had you sought support from the West and particularly the Bretton Woods institutions.
 Remember Sir, that the proposal for the funding of Thika superhighway was doing rounds among the donors in the West for 17 years before AfDB, our own DFI came in. These are but just a few pointers why you should borrow a leaf from your neighbor, President Yoweri Museveni.
Sothern bypass Nairobi:
Almost sabotaged by IFC
Sir Fossil fuel l Price increases are inflationary, and a 16 percent increase in the face of rising oil Prices will spark off an inflationary spiral that would add to the fires of other inefficiencies such as drought that has seen food prices spin through the roof. Such an increase, given its permanent nature, will kill everything you have been working for because it will keep consumer prices permanently high. It will kill your “Big four agenda” because the cost of doing business will rise, confounding an already not so rosy situation.
Mr. President Sir, economic growth will bridge any tax-shortfalls in the short term. Work towards economic growth and allow Kenyans to spend their meagre income on local goods but not on oil products. 
Various credible researchers project this country’s growth to be in the upwards of five percent this year. At the current GDP level of $75 billion, a five percent growth would generate an estimated $800 million in taxes.  That compares unfavourably with the Carrot $700 million in tax-revenue attached to the IMF stick.
According to various credible researchers, the middle class in Africa is driving economic growth at home. It has enabled the continent to shrug off shocks in the world market. Kenya is no exception. Please do not kill the goose that lays the golden egg.
 The reason you sought a standby credit from IMF, was to protect the family jewels. Just like my father, it was a wise move, but unnecessary. But we are humans and we cannot accurately foretell the future. I submit that the said turbulence is well behind us and you do not need any more cover. In any case, the first standby facility, worth US$1.5 billion was never utilized.  The probability of another being utilized is remote given the current world economic circumstances.
LTWP: Almost sabotaged
 by World Bank
Your Excellency Sir, let us visit some numbers.
According to both the World Bank and AfDB, the world economy has turned the corner and is expected to grow by two percent this year. Africa is expected to do even better as the turnaround in the world Economy will raise commodity prices, thus favouring Africa. Kenya is one of those countries that are expected to drive growth in Africa.
 Credible researchers also indicate that the banking industry in Africa is the second most profitable in the world after Latin America with profitability rate of up to 24 percent.  Other banks in the world earn far less and they still exist and lend. Kenyan banks, the research says, will remain profitable at 20 percent if the interest rate caps are retained.
 I have asked why the price of money in Kenya does not respond to the general price theory and I have never been given a persuasive answer.  All I hear are vague verbosity about risk profiles. Even here, risky profiles are lower at low prices than at high prices. Your Excellency, the refusal to lend to SMEs is, but blackmail so that the industry retains is obscene profitability.
 The benefit of these difficult choices is dismal, a paltry $700 million added to our tax- kitty and a few happy extorting Kenyans in the name of profits.  The additional benefits, an insurance on BOP support should the need arise does not look necessary. Yet that big brother keeps off on matters brick and mortar- building roads, water dams, and energy generation! These are the sectors that drive economic growth and lower the Debt/GDP ratio. The projected GDP growth rate of five percent this year will generate an estimated US$800 million in taxes.
According to Leading Economic Indicators, a publication by our very own National Bureau of Statistics, at the end of December Last year, our net Foreign Exchange Reserves, were comfortable at US$5.3 billion. Our gross Forex Reserves stood close to US$ 10 billion over the same period. But foreign debt obligations took the rest. I am comfortable as things stand and I believe the country is. But of course, we expect you to keep the debts low. Perhaps, we should surcharge officials who squander public resources on travel and other avoidable expenses.
My understanding of the trends in the world economy as it stands is; we don’t even need the standby facility. We can do very well without IMF meddling in our business. Your Predecessor, Mwai Kibaki, Kept the Bretton Woods institutions at an arm’s length during his tenure. They did not like him. But we did, and that is what matters.

Please, Your Excellency, do not succumb to IMF’s wiles. Let them remain where your predecessor kept them- on the back burner. You will be in good company!

Wednesday, 28 February 2018

Kenya confounds critics, raises $2 bn Eurobond

 Work on Nairobi -Naivasha section of SGR

 Kenya last week shook off negative news about its economy to raise US$2 billion in the second issue of a Eurobond in four years.

 The initial bond issued in 2014, was also met with bad news following an attack by “Al-shabaab” in Mpeketoni, Lamu, where 100 people were killed. The attack was seen in some quarters as an attempt to sabotage the issue, coming the day the issue opened.

The Market shrugged off the bad news bidding $8 billion. This time around, the country shook off a downgrade of the bond by Moody’s and the withdrawal of a standby facility by IMF. The recent issue was oversubscribed seven times, with bids totaling US$14 billion. There is also a feeling that the bad news was also designed to sabotage this issue.

 The success of the second issue has critics scrambling for metaphors.  if they had the sabotage of the second issue on the bad news, then they must be a disappointed lot. And now, they are harping on the country's alleged indebtedness to safe face. 

LTWP power station: Funded entirely by debts
The bad mouthing that characterized the first issue is also common with the second. The 2014 issue has been dogged by allegations of wrongdoing, with an allegation that US$1 billion was actually stolen. No evidence was ever provided to support the allegations. But the allegations continue. The second issue is being criticized for adding to the country’s debt burden.

The shake-off is a reflection of the horizon perspectives between traders and investors. Traders count the profits at the end of the trading day. Investors have a longer-term view, looking at the rate of return over a longer period rather than the difference between purchases and sales at the close of business daily.
 Investors have shaken off fears about the debt-to GDP ratio approach which traders are worried about. The ratio, which according to anti-debt activists is 54 percent, is said to be headed towards unmanageable levels.
Investors do not think so. They heard that before. The question is: how do the economic fundamentals look like? They are firm and looking good. Where will the money go? To be invested in infrastructure. Infrastructure is enablers of economic growth. That is it! The future looks bright.

But the Debt-to GDP ratio is still causing concern. However, there are two ways of lowering it: Fast economic growth while holding the debt levels low or cut borrowing and allow slow or static economic growth rate.

 Kenya has chosen to borrow to hasten economic transformation and set the stage for fast growth in the future through borrowing. Borrowing is bringing the benefits of future earnings to the present. 
 Kenya's borrowing  is anchored on her long-term development strategy whose aim is to create a “Globally competitive and prosperous country with a high quality of life by 2030.”   The idea is to shift the supply curve outwards to a new level of increased goods and services. That is, expand and diversify economic activity. Kenya’s GDP is expected to hit $120 billion by 2025, almost double the current level. That level will not be achieved unless the current bottlenecks are removed.

 Currently, agriculture, the driver of the economy is not operating at full potential. The manufacturing sector is also reeling under the weight of heavy costs. These inefficiencies are blamed on poor or insufficient infrastructure- energy, transport infrastructure, water, you name it.

This means massive investment, especially in infrastructure- and infrastructure is expensive. The country cannot provide the needed infrastructure from our tax revenue, even if a huge chunk of it went to infrastructure.

In fact, the current budget proposal gives the Ministry of transport, infrastructure, and housing Lion’s share of the budget in the coming financial year and probably beyond. And this will not be enough to build 10,000km of roads, seaports, airports, railway lines, water dams, and homes! That means some money has to come from elsewhere. There are only two options: bring in the private sector through PPP or borrow from them to invest.

 Given that investors have no stomach for sunk capital risk in areas such as generating geothermal power, the government has to take the risk and that means borrowing funds to sink in developing such sources. Borrowing from bilateral and multilateral lenders is almost out of the question for a country in a hurry to develop. The resources are not available from these sources because they also face budget constraints.
Smooth  and faster roads: Funded by debt
 Africa’s multilateral lender, AfDB, in its 2018 African Economic Outlook encourages Africa to tap into the US$100 trillion in savings held by Institutional investors and Commercial banks. Among the instruments it recommends is sovereign borrowing and PPPs.

To be sure, it cautions against creating personal monuments- projects that have no potential economic benefit but are politically palatable. And that is what everyone should be fighting against. It calls on Africa to invest in profitable Infrastructure to transform and industrialize Africa. It lists investment in the order of priorities as Energy, transport infrastructure and water. These are also the priority projects in Kenya.

So what is wrong with borrowing? Nothing! If invested in productive projects. Is there any evidence that borrowed funds have been wasted? We are yet to see it.  But we see goods roads, increased power supply, new railway lines and rolling stock, improved harbours, and water dams. Critics need not look far, Thika Highway was funded by debt, we are enjoying jam free rides. The Lake Turkana wind power project, worth US$786 million was funded entirely on debt. Come August and the project will add some 310 Mw in the national grid and, given its large size, we could soon see lower electricity bills. All these are infrastructure that enables economic prosperity as they cut the cost of doing business and create more jobs.
Therefore the question of not being able to repay the debts once the projects are up and running does not arise. The major concern should be that the projects are completed in time so that the country can enjoy the envisaged benefits and help repay their debts.

 The Standard Gauge Railway between Mombasa and Nairobi was completed 18 months ahead of schedule and the Nairobi- Naivasha section will be completed three months ahead of schedule. This eliminates cost-overruns and at the same time gives the country a bonus. The Nairobi Mombasa line has been operational for eight months now. This is because the funds are available and ring-fenced for the projects. Those funds were made available by borrowing.

Tuesday, 13 February 2018

Africa’s yawning gap in investment in infrastructure

Lake Turkana windpower station
Africa needs to spend a total of US$ 130-170 billion a year over the next seven years on productive and profitable infrastructure projects, says the Africa Development Bank. The expenditure in order of priority is US$ 35-50 billion on energy, $35-47 billion on transport, and $55-66 billion on water and sanitation.  Of the total capital needed, some $65 billion is already committed by governments and donors. That leaves a yawning gap of $68-108 billion dollars.

 The funds are out there in the world market awaiting into Africa’s productive infrastructure in order to industrialize, create jobs and enable inclusive development and dent the poverty rate.  Institutional investors and Commercial bank and sovereign fund managers are sitting over US$ 100 trillion, a small proportion of this huge savings is need to develop Africa’s infrastructure.

  A Solar Power farm
 All Africa needs is to craft bankable resource Mobilization strategies to fill this yawning gap. The continent, therefore, needs to dust off funds mobilization strategies.These include; Private-Public Partnerships and Foreign Direct Investments and bankable debt instruments.  Such attractive strategies would make Africa a major destination for investments funds.  And the economic prospects in the continent are mouth-watering. The middle class in the continent is growing and driving domestic demand for goods and services.

In fact, says AfDB, the growing middle class is part of the factors that insulate African economies from external shocks. The continent has proven resilient to external shocks, posting robust growth rates amid declining fortunes elsewhere. It is this growing middle class that is driving the growth in tax collection because it is driving demand for local manufacturers making them profitable tax-payers. This has seen tax collection in Africa rise to US$500 billion a year, elbowing out donor funding which stands at US$50 billion, below remittances which stands at $60 billion. Africa is thus a ready market for infrastructure services and a high return market for investment in such services.

 But why, given the huge tax revenue does Africa need investors in infrastructure, why not devote more funds to infrastructure? Simple, there are more competing demands for the limited tax revenue. Therefore, more funds are needed targeting infrastructure development. The resources should be preferably ring-fenced to develop infrastructure.
Entebbe Expressway Uganda: Easing travel time

AfDB prioritizes energy because of its huge economic potential. More than 640 million Africans have no access to energy, giving an electricity access rate for African countries at just over 40 percent— the world’s lowest. Per capita consumption of energy in Sub-Saharan Africa is 180 kWh, against 13,000 kWh per capita in the United States and 6,500 kWh in Europe. Further, access to energy is crucial for reducing the cost of doing business, unlocking economic potential and creating jobs.

Africa’s energy potential, especially renewable energy, is enormous, yet only a fraction is employed. Hydropower provides around a fifth of current capacity, but not even a tenth of its potential is utilized. Similarly, the technical potential of solar, biomass, wind, and geothermal energy is huge.  What is lacking is a pipeline of bankable projects which can attract foreign investors.
 JKIA Nairobi: EaSing international travel

The ball is now in Africa’s court to structure debt instruments to tap into that huge pool. The structuring should be geared towards attracting private investors into the actual development of certain infrastructure projects. Wind and solar are emerging as quick to install sources compared to say, geothermal energy, which takes decades to develop fully.

 But why prioritize investment in physical infrastructure? Unlike other socials investments such as in health and education, infrastructure directly affects productivity and output in the short-run. Increased output in electricity generating capacity will not only raise the stock of energy generating plants, it also part of GDP formation and as an input to the production function of other sectors. Increased availability of electricity will reduce power rationing, thus eliminating the need to invest in standby generators by manufacturing plants. This cuts the productions costs by enabling a more efficient use of conventional productive inputs.

Modern transport systems could increase manufacturing competitiveness cheaply and quickly, moving raw materials to producers and manufactured goods to consumers. Investment in transport infrastructure compliments investment is energy by opening up the market for the goods produced in the continent and cut the cost of doing business. And the resulting growth creates demand for employees thus reducing unemployment and poverty levels.
An SGR line: Easing bulk transport due to high speed

 However, African governments must now start weaning themselves from the provision of all infrastructure.  They must begin to charge the market price for Infrastructure services such as water, electricity, and road tolls. Such payments will ensure that there is enough money to repay the debt, a return to investors and foot maintenance costs thus easing the burden on the government budget. Dependence on tax revenue leads to decaying due to a limitation of funds.

Studies show that other infrastructure sectors are also profitable with IRRs ranging between 16 percent and 25 percent. Thus they are a good candidate for private sector investment providing a source of stable income flows in the longer term.

 Studies also show that  Capital markets in Africa are vibrant and sufficiently sophisticated to mobilize funds for infrastructure projects. Funds managers out there are you listening?